The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.

The Case Against the Charitable Deduction

November 16, 2005

Andrew Chamberlain

Andrew Chamberlain

With talk of scaling back deductions for home mortgage interest and state and local taxes in the headlines, there’s one hard-to-justify tax preference that’s being mostly ignored—the federal income tax deduction for charitable gifts.

Today’s New York Times has an excellent piece exploring a question that’s the subject of a forthcoming Tax Foundation report—is there any justification for subsidizing non-charitable non-profits at taxpayer expense?

Bottom line: not really. From the NYT piece:

Last year, the share of giving going to organizations most directly related to helping the poor hit a record low, accounting for less than 10 percent of the $248 billion donated by Americans and their philanthropic institutions.

Adjusted for inflation, gifts to health groups have almost tripled over the last four decades, and those to educational institutions have risen almost fourfold, while donations to human services groups are up only 28 percent…

Other statistics also suggest that the nonprofit sector has drifted from core notions of charity. Nonprofit hospitals provide no more charity care than taxpaying counterparts do. While university assets soar, tuition continues to outpace inflation. Only a sliver of giving to churches is spent on social services…

Has its definition been stretched so broadly that it no longer has meaning? If so, are the tax breaks that propel our philanthropy justified? (Full piece here.)

While subsidizing charities with tax preferences might make sense in theory, in practice the charitable deduction does of terrible job of it.

For one, its benefits are shockingly regressive. More than 75 percent of tax benefits from the charitable deduction went to the 12 percent of taxpayers with incomes over $100,000 on 2004. Taxpayers would never stand for that distribution of burdens for a direct spending program.

Second, many charities subsidized by the deduction are charitable in name only. Many look a lot like for-profit firms. Ms. magazine, Harper’s, Mother Jones and many other publications are subsidized as “charitable providers of educational materials.” The National Geographic Society sells videos and maps in direct competition with for-profit companies. The YMCA operates fee-for-service gyms. It’s hard to see how these groups deserve a subsidy at taxpayer expense.

Finally, by shifting part of the cost of private giving onto others, it forces some to subsidize gifts to nonprofits with goals opposite their deeply held beliefs—for example, gifts to pro-choice groups end up being subsidized by taxpayers with pro-life views, and vice versa. How is that good policy in a free society?

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The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.